Insider Trading and Corporate Innovation

Abstract

We examine how disclosure rules at the US Patent and Trademark Office (USPTO) have unintended real effects on insider trading opportunities and corporate innovation. The US patent application process provides a unique research setting that allows us to identify the exact point in time when insiders receive private information regarding the grant decision for pending patent applications from the USPTO. The American Inventors Protection Act (AIPA) of 2000, which made it mandatory to disclose patent applications within 18 months of the patent application date, regardless of whether a grant decision is already reached and communicated allows us to arrive at causal results. Supporting the claim that a reduction in insider trading opportunities decreases incentives to engage in innovation, difference-in-differences analyses reveal that corporate innovation output decreases post AIPA but only among firms that provide relatively low equity-based risk taking incentives to their executives.